The average adviser in the wealth management industry is over 50 years old. A significant percentage of the best performers are over 60. What does this mean for the industry over the next 10 years?
If you talk with the top wirehouse advisers and ask them how they built their practices, the stories they tell you will make you chuckle. Strangers actually answered their home telephones, listened patiently to the callers, and then sent them checks to buy municipal bonds. In suburban offices, prospective clients lined up on the street for hours to buy certificates of deposit paying 15% interest and up. Seminars that promised free lunches and financial wizardry were packed and resulted in accounts being opened on the spot.
Perhaps there are a few practitioners out there still doing seminars and cold calling, but I think it’s safe to say that they are no longer the standard operating procedures for building a wealth management practice. Because it’s harder than ever to attract new clients from scratch, teams have replaced corporate training programs for new advisers. Some of these teams have nurturing, teaching environments, but few of the leaders of these teams have any training on how to train newbies.
The cold, hard truth is that without enough new bodies coming into the industry, the total number of advisers in the industry is shrinking. Every firm shares the challenge of what I call natural attrition. They lose advisers to death, retirement, human resources mishaps, disability, and compliance problems. Only a few firms have been able to recruit enough young talent and established practices in sufficient numbers to exceed the natural attrition challenge. For the wirehouses and other wealth management firms that are steadily shrinking, the only hope of survival is to keep the assets and clients even if there are fewer and fewer advisers in-house to work with them.
Since they have largely given up on recruiting, the four wirehouses have all increased the retirement buyouts to their existing advisers. With strong restrictions on both the seller and the buyer, these programs are designed to ensure that these practices will never leave their legacy firms.
The flaw in their logic (which also applies to the mergers and acquisitions world of registered investment advisers) is not sufficiently recognizing that the key ingredient in every transaction is the clients’ assets — somebody else’s money — and the fact that the client might take his assets elsewhere.
Let’s say a reader out there wants to buy my car. He contacts me, test drives the car, and we agree on a price. I get the check, the buyer gets the title to the car and drives away. The car has absolutely no say in the transaction. Merrill Lynch might pay Joe the Adviser to retire with his book intact. But Sam the Client might have zero interest in staying with that practice after Joe is gone. And there is nothing Merrill or any other firm can do to force Sam to stay.
The same scenario applies in other service industries, like medicine, for example. I am a big fan of my family physician and have been with him for 20 or so years. He is older than I am and perhaps has dreams of selling his practice to his partners. I, however, am under no obligation to stay with the buyer. If over the next several years, I were to meet his successor during my occasional visits, I would be more likely to develop the relationship necessary to keep me as a patient of the successor practice. In the absence of meeting his successor, I am talking with friends with younger doctors so I am prepared for when my doctor finally does retire.
Older advisers face the same challenge as my doctor because in the absence of clear communication about a successor, clients will find their own solutions. Even with a clear succession plan, clients will often have their own new adviser picked out anyway, and most often this is outside their current adviser’s firm.
There are some practitioners who are uniquely talented and charismatic. That is why they are so successful and lead some of the most extraordinary practices in the industry. They are worth the most when they are recruited because they absolutely deliver their clients to their new firm. Their clients love working with them.
Ironically, these practices will be the most harmed when the alpha dog practitioner retires because the successors are unlikely to be as talented and charismatic as the alpha dog who built the practice; the clients are clients of that alpha dog adviser, not the practice, and not the firm.
Because of this dynamic, too many retiring adviser deals are really just the purchase of empty oil wells; there is uncertain production without the advisers who built the practice. The independent world has the exact same problem. Is there a thriving business without the founder in the picture? As top advisers retire over the next 10 years, I predict that the money given to them by their existing firms upon retirement, or by M&A buyers in the independent space, will become an even worse investment than the failed recruiting deals bemoaned and belittled by the largest firms in the industry.
Danny Sarch is the founder and owner of Leitner Sarch Consultants, a wealth management recruiting firm based in White Plains, N.Y.